UK Oil & Gas Plc

("UKOG" or the "Company")

 

Annual Review and Accounts for the year ended 30 September 2021

 

UK Oil & Gas Plc (AIM: UKOG), a UK and internationally focused energy company, is pleased to announce its full year results for the full year ended 30 September 2021. A copy of the full annual report and details of the Company's annual general meeting will be posted to shareholders in due course. A copy of the full annual report will also be made available on the Company's website.

 

Qualified Person's Statement

Matt Cartwright, UKOG's Commercial Director, who has 39 years of relevant experience in the global oil industry, has approved the information contained in this announcement. Mr Cartwright is a Chartered Engineer and member of the Society of Petroleum Engineers.

 

STRATEGIC REPORT FOR THE YEAR ENDED 30 September 2021

 

The Directors present their strategic report on the group for the year ended 30 September 2021.

 

OUR BUSINESS

 

UK Oil & Gas Plc ("UKOG" or the "Company") is an energy company currently primarily focused upon oil & gas exploration and production. We specialise in creating new geological ideas, concepts and methodologies to find and produce oil & gas from previously unexplored or overlooked rock formations within established petroleum producing provinces.

 

Our current operational focus is on the UK and Turkey onshore sectors, where we aim to build a sustainable oil & gas production base that can act as a springboard to further worldwide opportunities. UKOG has operated safely and environmentally responsibly in the UK since 2013.

 

Our current UK onshore portfolio consists of direct and indirect interests in six oil & gas exploration, appraisal, development and production assets, all situated within the Weald and Purbeck-Wight Basins of southern England. We are the largest acreage holder in the south of England, with assets covering 689 gross km².

 

We hold majority interests in four UK onshore oil & gas discoveries, the most notable being at Horse Hill and Loxley in Surrey, together with a significant position in the Kimmeridge Limestone (KL) oil deposit or "play". UKOG holds the largest acreage position within the play's most prospective area or "sweet spot", covering 489 gross km².

 

Our UK oil & gas portfolio contains a good balance of low-risk production, appraisal and development assets as well as upside exploration assets within both the Kimmeridge Limestone and Portland conventional plays.

 

Our portfolio in Turkey consists of a 50% non-operated working interest in the 305 km² Resan licence in southeast Turkey, containing the potentially significant undeveloped Basur-Resan oil discovery plus further exploration prospects. This project is assessed to contain significantly greater discovered oil volumes than any of our UK projects and, if successful, offers potentially transformational growth for the Company.

 

Our portfolio, notably Basur-Resan in Turkey, has the potential to generate significant returns for the Company and its shareholders.

 

The Company is reviewing the potential acquisition of further new international producing oil and gas properties which have the potential to deliver potentially significant short term cash flow. These assets also have the potential to become self-funding relatively quickly.

 

As a further diversification, we are increasingly active in the newly emerging geothermal energy field, where we possess the key subsurface and engineering skills necessary to make such projects work. We have teamed up with UK geothermal technology specialist Ceraphi Energy Limited ("Ceraphi") to evaluate the economic feasibility of transitioning a part of our Horse Hill site into a geothermal and solar energy hub. This hub could potentially supply heat energy to a defined significant industrial end-user in the area. We are also a founder member of the Geothermal Energy Advancement Association.

 

As well as standalone geothermal projects, we are currently investigating the viability of hybrid energy sites centred around subsurface gas and/or hydrogen storage. These projects are envisaged to  test the Company's hydrogen battery concept to provide peak-shaver power generation and green hydrogen generation from geothermal and other renewable sources. Two new prime coastal sites have been identified and are under active investigation.

 

A review of business activities in the year and future developments is outlined within the Statement from the Chairman (page 5), the Chief Executive's Statement (page 6) and the Operational Review (page 12).

 

OUR STRATEGY

 

UKOG aims to build a diverse, sustainable and self-funding international energy business which has the following strategic objectives:

 

Oil & Gas:

 

1.    Find and Develop Low-Cost and Long-life Assets 

-       Continuing to invest in new and existing near-term production assets in the international sector is a key priority. New assets added to the Company's portfolio must demonstrate potential self-funding capacity in the near term. Once in production, revenues from these assets will provide free cash flow to re-invest and deliver shareholder returns.

 

2.    Resource and Reserve Growth

-       Building our recoverable resources, reserves and future production through targeted and disciplined high-impact exploration, appraisal projects and acquisitions, both in UK and increasingly in the international sector.

 

3.    Balance Risk and Reward

-       Maximising value by ground floor or early entry where possible.

-       Judicious use of farmouts to provide operational funding.

-       Maximising return on investment by actively considering divestment after an asset has been de-risked, where appropriate.

 

 

Geothermal, Renewables and Hydrogen:

 

1.    UK Energy Diversification - Reduce Carbon Footprint of Company's Existing Petroleum Producing Sites

-       Where viable, implement geothermal and/or solar energy cogeneration plus battery storage from existing wells/sites.

-       Where viable, add new standalone geothermal and battery storage for grid/heat export.

 

2.    Find and Develop New Stand-alone Geothermal and Energy-hub Projects

-       Ground floor entry, either operated or as joint venture partner.

-       UK initial focus, international expansion if successful or commercially viable opportunities arise.

-       Strategic partnerships with sector technology specialists.

 

3.    Hydrogen

-       Investigate potential sites for hydrogen generation, storage and hydrogen battery concept.

-       Focus initially on the UK, with international expansion if successful or if commercially viable opportunities arise.

-       Ground floor operated entry through planning permission stages, with possible subsequent strategic partnerships/JV arrangements with a large infrastructure player.

-       Strategic partnerships with sector technology specialists.

 

Targeted Portfolio Management:

 

Continuously review and high-grade our portfolio to either acquire or divest further stakes in existing assets. We also look to acquire assets at any stage in the life cycle and are not limited by geography, where we can create significant value for shareholders.

 

UKOG shares this vision and strategy through internal dialogue with employees and externally with shareholders and stakeholders via public announcements and dissemination of information through our website and the Annual Report and Accounts.

 

STATEMENT FROM THE CHAIRMAN

 

Two years ago, the price of crude oil in the USA was briefly negative. As we approach the end of the first quarter of 2022, the picture is altogether optimistic and brighter, with Brent crude surpassing 100 dollars per barrel as I write this statement. The uncertainty of oil prices over the last 24 months has thankfully stabilised, but that cannot be said of the geo-political picture where any number of dramas could unfold which could alter the mood of our industry.

That is why I am excited by UKOG's pursuit of opportunities in renewable energy, notably in respect of geothermal energy and gas storage solutions for hydrogen development. As a country the UK needs to be more self-reliant and less dependent on international gas pipelines. Over decades we have allowed our gas storage capacity to fall alarmingly. UKOG, a company with multi-faceted ambitions and abilities, is looking at domestic projects which could reverse that decline. Additionally, the management team is also considering several other potentially exciting opportunities both domestic and international and is proactively seeking to diversify the Company's portfolio in recognition of the rapidly evolving industry landscape.

The Company's gas project at Loxley is in the hands of the Secretary of State after a tortuous appeal process, but I hope that common sense will prevail and follow the view of Energy Minister Greg Hands who said: "We will always prefer British gas production to foreign imports". Given today's mammoth carbon footprint of importing oil and gas into the UK, why should the resources directly under our feet, including Loxley, not be drilled and developed?

I have only recently taken on the role of Chairman, but I have had close links with UKOG for many years and fully support the efforts of Stephen Sanderson to take on new opportunities in new territories and in new sectors. Whilst some private investors may harbour concerns regarding the recent trend in the Company's share price, raising funds from equity remains a necessary part of UKOG's strategy as it continues funding the forward growth of its high priority projects. This will remain the case until such time as the Group is generating self-sufficient cash flows from operations. Reserve-based lending is rarely an economic option for junior oil companies primarily engaged in exploration and, whilst I have sympathy for any frustrations regarding share dilution, I am encouraged that the Company is building a highly desirable and carefully curated asset portfolio with long-term economic promise.

It requires a great deal of specialist knowledge and experience for a business to spin several plates in this industry, however geographical and sector-based diversification remains core to UKOG's ambitions. Tireless efforts continue to be made in the pursuit of maximising shareholder value, and as ever there is no room for standing still.

I confidently predict a busy 2022 on all fronts, both home and abroad. There will rarely be a dull moment and, as we approach the drilling of our first production well in Turkey, let's hope for an enjoyable and profitable ride.

 

 

 

Nicholas Mardon Taylor

Non-Executive Chairman, 24 March 2022

 

 

 

CHIEF EXECUTIVE'S STATEMENT

 

I am delighted to be able to write this Annual Report in a more optimistic environment than a year ago, with the Covid-19 pandemic beginning to be brought under control thanks to the creative intervention of science-based solutions in double-quick time.

 

UKOG has emerged blinking into the glow of a new world of opportunity as we explore, amongst other opportunities, fresh commercial ideas for renewable energy generation. As was made perfectly clear during the COP26 climate change conference in Glasgow last Autumn, the world requires fossil fuels for the foreseeable future to sustain our lifestyle and to keep our homes and businesses warm and lit, but we all acknowledge that it is vital to move towards cleaner methods of power generation and transportation.

 

It is not a case of out with the old, in with the new. More a case of a sensible and logical transition. As Business Secretary Kwasi Kwarteng put it, "transition" from oil and gas "not extinction".

 

With this in mind, we have spent time and energy looking at creating an all-encompassing energy hub in the south of England for geothermal power generation, where we have identified a prime site for geothermal energy and a first-rate end user. Our high-level ambition is to convert part of our Horse Hill well site into a geothermal energy hub, having signed a Heads of Terms agreement with geothermal specialists Ceraphi, who confidently predict that we could supply more than 200,000 megawatt hours per year of continuous baseload from that site primarily in the form of heat energy.

 

We are also actively evaluating two potential sites in the UK for hydrogen generation and storage, to take advantage of the national transition from natural gas to hydrogen for industrial and domestic power and heating demands. Part of the project would encompass a new 'hydrogen-battery' concept to store energy for use during peak power demand, together with 'green-power' from geothermal to generate 'green-hydrogen'.

 

These are early days, but they are also exciting ones for the Company as we actively embrace this new world and its unique challenges.

 

A year ago, we spread our international reach into Turkey having entered an exciting joint venture with Aladdin Middle East ("AME"), exemplifying our ongoing strategy of active portfolio management. We are continually high grading our portfolio, both by seeking new high potential assets and divesting lower ranking assets, as and when opportunities present themselves. In this way we can harness fast-tracked organic growth through the project execution stage.

 

In this spirit of expanding our horizons we have completed the evaluation of potentially lucrative proven oil & gas field opportunities elsewhere in the world, including in the United States, where access to such opportunities has arisen from within the Directors' extensive business network. Should negotiations be successful, there is the realistic prospect of adding significantly to both our reserves and cash flow base in the coming year.

 

Turkey

UKOG's December visit to Ankara for first-time face-to-face meetings with our joint venture operator AME was hugely successful and of great benefit to all concerned. Travel restrictions in place due to Covid-19 had prevented this trip ever since we completed our Farm-In agreement for a 50% non-operated working interest in the 305 km² Resan Licence.

 

The Resan Licence lies within the SE Anatolian basin, a geological continuation of the prolific Zagros "fold-belt" petroleum system within the foothills of the Taurus-Zagros mountains in Iraq, Iran and Turkey, one of the Middle East's major oil producing areas. Multiple producing oil fields lie to the immediate west and south-east of the Licence, containing significant proven recoverable reserves.

 

The recent focus at our Basur-Resan licence has been the acquisition of a 2D seismic programme. This followed news from AME that drilling of the Basur-3 appraisal well was halted when the directional assembly was temporarily stuck in the 12¼" hole section. Credit must be given to AME's drilling team who performed a successful recovery or 'fishing' operation to return the assembly safely back to surface.

 

With the first phase of seismic acquisition now complete, we look forward to the drilling of a Basur-3 sidetrack ("B-3S") once processed seismic results have been received. B-3S is located within the north-western
structural culmination of the 60 km² Basur-Resan anticlinal structure, with a surface location approximately 1.2 km north of the 1964 Basur-1 oil discovery well.

 

The B-3 appraisal well was the first modern well designed to properly appraise and assess the extent and commercial viability of the Basur-Resan oil pool discovered in the 1950s-1960s. Its primary objectives were the naturally fractured and dolomitised limestone rocks of the Cretaceous age Garzan and Mardin formations, which are productive at our partner AME's East Sadak oil field, whose western edge is some 20 km to the southeast and along the same geological anticlinal trend.

 

AME's and the Company's bid for three new licences in last year's Turkish mini-licence round, announced on 10 December 2020, was ultimately unsuccessful. The mini-licence round attracted several other bidders including the Turkish national oil company, TPAO, to whom the licences were awarded. Although the result was disappointing given the work programme offered by AME and UKOG, the bid was always ancillary to the Company's main focus of appraising Basur-Resan.

 

The Company continues to look for additional projects in Turkey and has reviewed a further new opportunity to the southeast of our Resan licence. This contains an interesting and potentially material undrilled anticlinal feature analogous to both East Sadak and Basur-Resan.

 

Horse Hill

The focus at Horse Hill has been on optimising production and keeping capital expenditure under firm control. To assist this, we completed a material purchase of surface production equipment from PW Well Test. A more efficient and suitable gas flare has also been installed at the site.

 

A facilities upgrade was completed in the year, with modifications made in preparation for transitioning the site to automated 24-hour production, together with the installation of the first tranche of permanent facility equipment required under the Health and Safety Executive's Control of Major Accident Hazards (COMAH) regulations.

 

Well intervention operations were completed efficiently towards the beginning of the year. Despite the resulting October and November downtime, total Portland oil production during the first quarter was 7,045 bbl. Average production uptime was 57% over that period and ranged from 37% during October's main HH-1 intervention period, to 85% in November, post-intervention.

 

Notably, the Oil and Gas Authority ("OGA") granted two-year extensions to the remaining deadlines for the PEDL137 and PEDL246 Retention Area work programmes in the year, and at the end of 2020 over 162,000 bbl of Brent quality crude had been produced and exported from the Kimmeridge and Portland pools.

 

Injunction

The High Court upheld the Company's injunction against unlawful protests at the Horse Hill site. Mrs Justice Falk found that there was a sufficiently real and imminent risk to justify the interim injunction order and its revised scope, which prohibits trespass to the site's land, obstruction of the main entrance and lorry surfing. The injunction remained in force until autumn 2021.

 

Judicial Review

We were delighted that in February 2022 the Court of Appeal rejected the Judicial Review ("JR") appeal of Surrey County Council's ("SCC") September 2019 planning consent for long-term oil production at Horse Hill, 85.635% owned by UKOG. The written judgement means that the planning consent for Horse Hill oil production was granted entirely lawfully and, as such, confirms that Horse Hill can remain operational until the end of its commercial field life.

 

This latest judgment in UKOG's favour comes after more than two years in which Sarah Finch on behalf of the Weald Action group has sought to stop the Company's oil production at Horse Hill. Given that during this time five judges have found against their case, one cannot help but wonder why they were permitted so many repeated bites at the same legal cherry. That seems at very least unfair and perhaps is also somewhat unjust.

 

Loxley

The future of our wholly-owned gas appraisal project at Loxley is now in the hands of the Secretary of State for Levelling Up, Housing and Communities (SoS), who has recovered the Company's appeal against Surrey County Council's decision to refuse planning consent. The final appeal determination will now be made by the SoS utilising the Planning Inspector's report and recommendation. 

 

Whilst the Company had expected a decision from the Planning Inspectorate in the first quarter of 2022, the recovery by the SoS may lengthen the timeline for an appeal decision.

 

The project was refused twice by SCC in June and November 2020, before a virtual public inquiry was held in August 2021.

 

As questions regarding the UK's gas supply and record high gas prices have risen to the fore in recent months, I hope that in deciding the appeal, the SoS will carefully consider how Loxley gas, as a secure domestic source, could help address various pertinent national issues, including how the increasing import dependency exposes UK consumers to upwards gas price volatility and decreasing security of supply. New domestic gas, such as Loxley, could help mitigate this situation.

 

Similarly, higher pre-combustion carbon footprint LNG imports could also negatively impact the initial phases of the UK's 'Hydrogen Economy' from a net zero aspect, as it is widely predicted that 'blue hydrogen' from methane reforming will initially constitute a significant proportion of available hydrogen.

 

Domestic gas offers a significant "net zero advantage" in this respect. The Company has stated that, if granted necessary permissions, it plans to supply Loxley gas as a feedstock for reforming into hydrogen, fully in keeping with the government's net zero ambitions and plans.

 

Isle of Wight

The disappointing, but not unexpected, decision by the Isle of Wight's planning committee to refuse consent for the appraisal and testing of the Arreton discovery merely served to underscore our growing interest in the international arena for oil and gas, and our new direction into geothermal and hydrogen-based energy in the UK. The refusal went against the recommendation by the council's planning officers to approve the project.

 

We took considerable care and undertook much research to minimise the potential impacts of the site, choosing a location 300m distant from the A3056 and adjacent to land with existing non-agricultural commercial uses, namely the Wight Farm Anaerobic Digestion Energy Power Station and the Blackwater Quarry for aggregates. No objections to the development were raised by statutory consultees on environmental, drinking water, landscape or health and safety grounds.

 

Given the number of new opportunities available to the Company, all of which are considered to offer far greater success case economic impact and higher probabilities of success than the proposed Isle of Wight project, the Company has decided not to appeal against the planning refusal. The envisaged £0.5 million planning appeal costs will therefore remain available and could be used for developing new oil & gas and geothermal/energy storage projects (see New Ventures below).

 

New Ventures

The Company evaluated a number of potential producing oil & gas fields and near-term production opportunities in the period with the greatest number being within the United States, where the career histories of the Board give privileged access to a broad network of opportunities. A full due diligence evaluation of one international property is now in its final stages.

 

As stated above, the Company is also currently evaluating the technical and commercial feasibility of two new potentially significant geothermal-hub projects together with two hydrogen-hub storage and renewable energy projects, one in the south of England and the other in the northeast.

 

The Company hopes to bring at least one new oil and gas opportunity and one or more geothermal-hub and hydrogen-hub projects to fruition in the coming year.

 

In tandem with most other similar companies, UKOG relies on the liquidity of its shares to be able to raise funds from equity, which it views as the most sensible and realistic way of funding the growth of its projects and portfolio pipeline. However, with UKOG's wide-ranging activity and interests we firmly believe that the Company is progressing towards being self-sufficient in its generation of cash flows.

 

During the reporting period, we successfully raised £2.2 million in October 2020 to fund our share of initial drilling and seismic costs in Turkey. This was followed in July 2021 when we successfully raised approximately £5.0 million to fund our remaining share of the Basur-3 appraisal well's drilling, completion and testing costs and planned 2D seismic acquisition costs.

 

At the same time, we decided to announce an Open Offer to all shareholders to give them the opportunity to invest on the same terms as those who participated in the Placing. This resulted in the Company raising a further £0.5 million.

 

Last summer we also completed the final instalment due under the sale and purchase agreement of the Horse Hill surface production equipment from PW Well Test Ltd. UKOG acquired the equipment for a total of £1.65 million. 

 

Director Share Purchase Programme

In May 2021 we announced that the Company was committed to put in place an annual MAR compliant Defined Director Share Purchase Programme in which a director commits to purchase UKOG ordinary shares each month equivalent in value to a fixed percentage of their net monthly salary. I made my first purchase in December and am continuing to make monthly purchases in line with the programme.

 

Market Place

The oil and gas industry has rebounded strongly throughout 2021, with oil prices reaching their highest levels in six years. At the time of writing, Brent prices have surpassed $100 per barrel, with concerns about the omicron variant of Covid-19 easing. This optimism has been tempered by the worrying events in Ukraine which will have a direct impact on our future security.

 

Renewables

UKOG became one of the six founder members of the newly formed Geothermal Energy Advancement Association ("GEAA") in line with our goals, strategy and ambitions to enter this new sector at birth. We believe our membership can help raise awareness amongst policy makers and the public of the benefits of this renewable energy sector. The potential conversion of part of our Horse Hill well site into a geothermal energy hub represents the Company's first direct step into this sector.

 

Board Changes 

We announced just before Christmas that, after a thorough external recruitment process, Matt Gormley had joined UKOG as the Company's Chief Financial Officer, a non-board position. He was previously Group Financial Controller of Shanta Gold Limited and an Audit Manager at Grant Thornton UK LLP. I was delighted to welcome Matt into the UKOG team. His fresh perspective from an alternate sector will be particularly valuable as UKOG seeks to expand internationally and diversify into green geothermal and hydrogen energy within the UK.

 

With effect from 1 January 2022 the board was also restructured, with Kiran Morzaria stepping down as Finance Director to become a Non-Executive Director. Allen Howard moved from Non-Executive Chairman to become an Executive Director of the Company on a part-time basis. Nicholas Mardon Taylor became Non-Executive Chairman.

 

I would also like to take this opportunity to express my sincere thanks and gratitude to Kiran Morzaria for his huge influence on the Company. I'm pleased with Kiran's continuing involvement, albeit on a non-executive basis.

 

Stephen Sanderson

Chief Executive, 24 March 2022

 

 

For further information, please contact:

UK Oil & Gas PLC
Stephen Sanderson / Matt Gormley / Allen D Howard	Tel: 01483 941493
WH Ireland Ltd (Nominated Adviser and Broker)
James Joyce / Andrew de Andrade	Tel: 020 7220 1666
Communications
Brian Alexander	Tel: 01483 941493

 

This announcement contains inside information for the purposes of Article 7 of the UK version of Regulation (EU) No 596/2014 which is part of UK law by virtue of the European Union (Withdrawal) Act 2018, as amended ("MAR"). Upon the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

UKOG continuously monitors its risk exposures and reports its review to the board of directors ("The Board"). The Board reviews these risks and focuses on ensuring effective systems of internal financial and non-financial controls are in place and maintained.

Key Risk Areas

 

Key risk areas surrounding our existing business are tabulated below; categorised as being Strategic, Operational and Financial.

Risk	Mitigation	Magnitude and likelihood
Strategic risks
Exposure to political risk, we operate in and may seek new opportunities in countries, regions and cities where political, economic and social transition may take place. Political instability, changes to the regulatory or taxation environment, international trade disputes and barriers to free trade, international sanctions, expropriation or nationalisation of property, civil strife, strikes, insurrections, acts of terrorism, acts of war and public health situations (including the continued impact of the COVID-19 pandemic or any future epidemic or pandemic) may disrupt or curtail our operations or development activities and could affect the ability of UKOG to deliver to its Strategy.	Through industry associations and direct contact, the Company engages with Government and other appropriate organisations to ensure the Company is kept abreast of expected potential changes and takes an active role in making appropriate representations.	Magnitude- High Likelihood - Medium
Operational risks
Permitting risk, planning, environmental, licensing and other permitting risks associated with our operations particularly with exploration drilling operations.	During the period the Company continued to face several challenges in obtaining all the permits that it requires to deliver on its strategy. This is despite UKOG's compliance with regulations, proactive engagement with regulators and communities, and the expertise and experience of its management team. We believe this is because of changing priorities within the United Kingdom and the Company has sought to further diversify this risk by seeking investments outside the United Kingdom.	Magnitude- High Likelihood - High
Exploration risk, the Company fails to locate and explore hydrocarbon-bearing prospects that have the potential to deliver commercially, e.g. key wells are dry or less successful than anticipated.	Analysis of available technical information to determine the work programme. Risk-sharing arrangements entered to reduce downside risk.	Magnitude- High Likelihood - High
Oil production, oil is not produced in the anticipated quantities from the Group's assets, or it cannot be produced economically.	Analysis of available technical information to improve our understanding of the reservoir and continue to review cost structure to target low production costs.	Magnitude- High Likelihood - Medium

 

Price and markets, our financial performance is impacted by fluctuating prices of oil, gas and refined products. Oil, gas and product prices are subject to international supply and demand and margins can be volatile. Political developments, increased supply from new oil and gas or alternative low carbon energy sources, technological change, global economic conditions, public health situations (including the continued impact of the COVID-19 pandemic or any future epidemic or pandemic).	During the previous reporting period the Group entered into production at Horse Hill. The Group determined that given its stage of development the costs of hedging would be prohibitive. The Group continues to will continue to keep this under review. At this point the Group also continues to review costs where appropriate.	Magnitude- High Likelihood - High
Loss of key staff	Provide and maintain competitive remuneration packages to attract the right calibre of staff. Build a strong and unified team.	Magnitude- High Likelihood - Low
Financial risks
Liquidity risk, exposure through its operations to liquidity risks.	The Board regularly reviews UKOG's cash flow forecasts and the availability or adequacy of its current facilities to meet UKOG's cash flow requirements.	Magnitude- High Likelihood - Medium

 

OPERATIONAL REVIEW

 

UKOG's operational activities were concentrated on the Horse Hill oil field, located near Gatwick Airport, and on the Resan licence in south-east Turkey, containing the undeveloped Basur-Resan oil discovery.

 

Horse Hill Oil Field, PEDL137 and PEDL246 (UKOG 85.635%)

The field and surrounding licence is operated by UKOG's subsidiary company Horse Hill Developments Ltd ("HHDL") in which UKOG has 77.9% ownership. The Licensees are HHDL (65% interest) and UKOG (137/246) Ltd (35% interest).

 

At the beginning of the reporting period, further well intervention operations on Horse Hill-1 ("HH-1") were safely completed, optimising oil flow by isolating the Kimmeridge perforations, by reperforating the full Portland oil producing section, by insertion of a new simplified production tubing string and by setting the downhole pump at a deeper level than the existing perforations to increase pumping efficiency.

 

The intervention was immediately followed by an ongoing series of multi-week production optimisation trials to achieve an optimum balance between oil revenues and water handling and other operational costs. Trials include well-cycling (i.e., shutting in the well for a set period each day to reduce water inflow) and pump optimisations. The trials continued for several months.

 

These improvements set HH-1 up for long term continuous and optimised oil production from the Portland. Conversion of the HH-2z well to water injection, subject to regulatory approval, plus further infill development of both Portland (HH-3 well) and Kimmeridge (HH-4 well) offer significant upside for the Horse Hill field.

 

Pressure build-up data was also carried out confirming the HH-1 connected oil in place volumes of 7-11 mmbbl.

 

The removal of ancillary third-party rental equipment and the purchase of the surface production equipment from PW Well Test Ltd was completed.

 

Due to the coronavirus pandemic the OGA granted two-year extensions to the remaining deadlines for the PEDL137 and PEDL246 Retention Area work programmes.

 

Planned shutdowns were successfully completed to install new surface production facilities in line with requirements under the Control of Major Accident Hazards (COMAH) Regulations. In addition, a new more efficient gas flare was installed and commissioned successfully at Horse Hill.

 

As of end-December over 162,000 bbl of Brent quality crude had been produced and exported from the Kimmeridge and Portland pools.

 

Significant efforts have again been made in managing and reducing operational costs. Recent Brent crude prices of over $90/bbl have helped operational cash flow from the field.

 

During the period an energy efficiency study was completed for Horse Hill to reduce diesel consumption and carbon emissions recommending the installation of 250kW solar PV and 67kWh Li-ion battery storage. Further detailed scoping is required during the next period to confirm capital expenditure and timings for the project within the overall field development.

 

Post period, the Company announced the signing of a Heads of Terms with geothermal specialists Ceraphi to enter into a joint venture agreement to develop part of the Horse Hill site into a geothermal energy hub (GeoHub). The GeoHub, currently at a conceptual stage, is targeted to generate and supply more than 200,000 MWh per year of continuous baseload, primarily as heat energy. The project's first phase would aim to supply significant industrial end-users in the locality with 100% green heating and cooling plus ancillary green electricity and/or hydrogen.

 

Turkey, Resan Licence (UKOG 50%)

In October 2020, UKOG completed a Participation Agreement and Joint Operating Agreement with Aladdin Middle East Ltd ("AME"), an independent oil company with 60 years of operational experience in Turkey, to take a 50% non-operated working interest in the 305 km² Resan Licence.

 

UKOG is taking an active technical role in a 4-well oil appraisal and step-out exploration drilling programme designed primarily to assess the commercial viability of the significant Basur-Resan oil discovery. The transaction was approved by the Turkish government and completed in January 2021.

 

The Resan Licence lies within the SE Anatolian basin, a geological continuation of the prolific Zagros "fold-belt" petroleum system within the foothills of the Taurus-Zagros mountains in Iraq, Iran and Turkey, one of the Middle East's major oil producing areas. Multiple producing oil fields lie to the immediate west and south-east of the Licence, containing significant proven recoverable reserves.

 

UKOG quickly built on this exciting entry into Turkey by submitting an application for three further exploration licences covering four blocks, again with a 50% interest and AME as operator. Disappointingly, however, the Turkish government decided to award the licences to the Turkish national oil company, TPAO.

 

Construction of the drilling pad and access road for the Basur-3 ("B-3") appraisal well began in March 2021 and was completed in May. The Turkish Energy Ministry approved drilling of B-3 in April and well was spudded on 26^th June. The directional drilling assembly became stuck in the 12¼" hole section whilst pulling out of hole. The rig performed a successful recovery or 'fishing' operation to free the drilling assembly and return it safely back to surface. The incident occurred after the well had made good progress, reaching a drilled depth immediately above the Garzan and Mardin target objectives, which remain untested.

 

AME advised that, to achieve the well's primary objective of appraising the Basur-1 oil discovery, a deviated mechanical sidetrack, B-3S, is planned, the existing 12¼" hole section being considered unsuitable for onwards drilling. AME further advised that, to ensure the sidetrack is optimally located, they plan to pause further drilling until after the acquisition and processing of the new seismic data over the sidetrack's envisaged trajectory.

 

The B-3 appraisal well was the first modern well designed to properly appraise and assess the extent and commercial viability of the Basur-Resan oil pool discovered in the 1950s-1960s. Its primary objectives were the naturally fractured and dolomitised limestone rocks of the Cretaceous age Garzan and Mardin Formations, which are productive at our partner AME's East Sadak oil field, whose western edge is some 20 km to the southeast and along the same geological anticlinal trend.

 

Active planning of B-3S is well underway and initial discussions with prospective drilling rig contractors have taken place, with detailed well planning and contractor selection progressing. In the interests of maximising cost efficiencies, plans are in place for surplus UKOG-owned casing to be transferred to the B-3S site for utilisation during drilling. It is planned that the well will commence upon receipt and interpretation of the fast-track seismic processing,

 

Good progress has been made post period by Viking Geophysical Services (VGS) in acquiring the 2D seismic programme. VGS' acquisition programme is being overseen by an expert quality control consultant and a first tranche of acquisition (Phase 1) has been completed. Priority has been given to process 3 lines covering the B-3S area and trajectory plus the proposed new Resan-6 drilling location. Existing legacy data has also been recently reprocessed and a pre-stack depth migration process has commenced aimed at sharpening the seismic imaging of faults that may be encountered along the B-3S trajectory.

 

Loxley, Broadford Bridge, PEDL234 (UKOG (234) 100%)

The OGA approved an amendment to the PEDL234 Retention Area work programme, wherein Loxley-1 is to be drilled by December 2023.

Following Surrey County Council's (SCC) initial 29^th June 2020 planning committee meeting, SCC decided that the Loxley Gas project should be redetermined on 27^th November 2020. However, again contrary to the recommendation of its own planning team, SCC refused Loxley planning consent. In February 2021 UKOG filed an appeal to the Planning Inspectorate, with our leading legal counsel advising that there are strong grounds to expect a positive appeal outcome. The appeal was heard via a public inquiry commencing on 27^th July 2021.

 

Post period, the Planning Inspectorate advised that the Secretary of State ("SoS") had recovered the appeal. The final appeal determination will now be made by the SoS utilising the Planning Inspector's report and recommendation. 

 

The Company has submitted a further planning permission extension application to West Sussex County Council's Planning Committee for its Broadford Bridge-1/1z Kimmeridge oil discovery.

 

Arreton, Isle of Wight, PEDL331 (UKOG 95%)

UKOG's planning application to the Isle of Wight Council for the appraisal drilling and flow testing of the Arreton oil discovery was refused post period. Having taken time to consider, the Company has decided not to appeal this decision.

 

Other Assets

Stable oil production with low water cut continues from the Horndean oil field in Hampshire (UKOG 10%).

 

 

 

 

 

Kris Bone                                                                                               Matt Cartwright

Operations Director                                                                            Commercial Director

24 March 2022                                                                                     24 March 2022

 

 

 

 

FINANCIAL REVIEW

 

Income Statement

 

Revenues for the year from sales of oil amounted to £1.56 million (2020: £0.91 million). This increase of 71.4% was largely driven by long term oil production having commenced partway through the 2020 financial year at Horse Hill, via HH-1. The Group sold 36,664 bbl from Horse Hill and Horndean during the year at an average sale price of £43/bbl.

 

Depletion, Depreciation and Amortisation costs amounted to £0.69 million (2020: £1.37 million), reflecting the stabilisation of production from Horse Hill during the year and the impact of certain assets being fully depreciated during the previous financial year. Other Cost of Sales reduced to £1.07 million (2020: £1.17 million). The Group recorded a gross loss for the year of £0.19 million (2020: £1.63 million).

 

Administration expenses during the year amounted to £2.10 million (2020: £1.76 million). Following an impairment review carried out as at 30 September 2021, the net present value of the HH-1 well at Horse Hill was determined to be lower than its recorded book value, and it was therefore determined that the value of associated oil & gas properties should be impaired by £1.46 million. This lower net present value assessment was primarily due to lower-than-expected flow rates at HH-1 where production rates have now stabilised following commencement of long-term oil production during the previous financial year. 

 

An Operating loss for the year of £3.81 million was recorded (2020: £14.1 million). Finance costs amounted to £0.89 million (2020: £0.29 million), relating primarily to unwinding of discounts on decommissioning provisions. An exploration write-off of £0.95 million was recognised following the Company's decision not to appeal the October 2021 decision by the Isle of Wight Council's Planning Committee to refuse consent for the appraisal and testing of the Arreton oil and gas discovery.

 

The net effect of the above was a retained loss for the year of £4.89 million (2020: £20.94 million).

 

Balance Sheet

 

During the financial year to 30 September 2021, non-current assets decreased to £37.68 million (2020: £37.78 million). This included the effects of an impairment of oil & gas assets at Horse Hill, an exploration write-off at the Arreton oil and gas discovery, and £2.11 million of capital expenditure on oil exploration & evaluation assets, primarily at the Basur-Resan oil discovery in Turkey.

 

Cash and cash equivalents totalled £4.73 million at the year-end (2020: £1.63 million) which contributed significantly to an increase in current assets from £2.38 million at 30 September 2020 to £5.36 million at 30 September 2021. Current liabilities decreased to £4.15 million (2020: £5.07 million) following a reduction in trade and other creditors.

 

At the end of the year, the Group's net assets amounted to £37.50 million (2020: £34.01 million).

 

Cash Flow and Financing

 

The net cash outflow from operating activities during the reporting period was £1.41 million (2020: cash outflow of £2.77 million). The reduced outflow is primarily attributable to working capital movements and twelve months of operating cash flows from Horse Hill in the year to 30 September 2021.

 

UKOG raised £7.12 million during the reporting period via the issue of equity (net of share issue costs), which was used primarily to fund investing activities (£2.72 million). A portion of the amount raised remained unspent at the end of the year.

 

As a result of the above, the Group recorded a £3.09 million net increase in cash and cash equivalents during the year and had £4.73 million in cash and cash equivalents at the end of the year.

 

 

 

Matt Gormley

Chief Financial Officer

24 March 2022

 

KEY PERFORMANCE INDICATORS

 

UKOG has adopted both financial and non-financial key performance indicators (KPI's) to measure progress against our strategy. These KPI's will develop and new ones will be added as we progress our strategy.

 

KPI's
	Production (bopd)	Operating costs (£/bbl)*	Operating Cashflow £m
	Year 2021 2020 (bopd) 140 128   HH-1 entered into production during March 2020. These rates are reported on a gross basis and as such represent all production and relevant costs irrespective of amounts attributable to non-controlling interest shareholders of operating subsidiaries.	Year 2021 2020 (£/bbl) 29 28   HH-1 entered into production during March 2020. Operating costs have remained largely consistent since production from HH1 stabilised.	Year 2021 2020 £m (1.41) (2.77)   Operating cash outflows reduced during the reporting period as a result of higher revenues and working capital movements.
Reason for choice	Group production will provide operating cashflow to fund our investments and deliver shareholder value. At this point in time we receive production from our ownership in the Horndean oil field which is not under our control and the Horse Hill oil field of which we own 85.635%.	Operating costs per bbl are a key focus at our operations and the focus for the Company is to keep these costs low, so as to improve cash generation from our producing assets. Currently, operating costs are in relation to our ownership of the Horndean oil field (10% ownership), which is not under our control, and the Horse Hill oil field of which we own 85.635%.	Cashflow is key to providing funding for investing in the business and pursuing our strategy. This has to date been funded predominantly via equity and debt.
How we measure	Daily and weekly production is monitored for all producing assets and reported to senior management. Production forecasts are prepared during the year to measure progress against the production target.	Operating costs are monitored closely, to ensure that budget targets are being met.	Cashflow forecasts are reported to the Board on a regular basis, to ensure our progress is within our budget. Long-term forecasts are also provided to ensure that the strategy of the business can be adequately funded.

 

* Operating costs exclude depreciation of the oil asset and indirect management charges from UKOG

 

Other non-Financial KPI's
	Lost time injuries (LTI & LTI Frequency)
	2021 - 0, LTI Frequency 0; 2020 - 0, LTI Frequency 0
Reason for choice	Health & safety is our highest priority and we look to provide the highest level of protection to all our stakeholders
How we measure	We track HSE lagging indicators during the year, which are reported to the Board. We aim to have zero LTI's. If we have an LTI it is investigated, and a clear remedial action is identified and implemented.

 

 

 

RESERVES AND RESOURCES

 

Total aggregate net discovered 2C (mid case) contingent resources and 2P (mid case) reserves now stand at 37.48 mmboe.

 

HH-1 production remains in contingent resource category, while the company waits on the Environment Agency Production Permit. Upon the receipt of this permit, the company intends to review the HH-1 production decline and attribute reserves to HH-1, thus transferring them from Contingent Resources to Reserves category.

 

Discovered prospective resources (i.e., undiscovered but drill ready within identified exploration prospects) remain the same as last year, while we seek to resume drilling on the Turkey Basur-Resan licence.

 

Table 1: Recoverable Reserves mmbbl: Producing Fields, Gross and Net (as of 31 December 2021)

 

Asset	UKOG % Interest	Gross mmbbl			Net Attributable mmbbl			Operator
		1P	2P	3P	1P	2P	3P
Horndean 1	10	1.02	1.20	1.37	0.10	0.12	0.14	IGas
TOTAL (mmbbl)² ³					0.10	0.12	0.14

 

Notes: 

1. DeGolyer and MacNaughton ("D&M") for IGas Feb 2022, 2. Horse Hill reserve volumes await external CP verification following 12 months of stable production history, see text above, 3. Avington is temporarily shut-in, consequently no reserves are attributable, recoverable resources shown in Table 3 below.

 

Table 2: Contingent Resources mmbbl/mmboe (i.e., discovered and drill ready recoverable volumes)

 

Asset	Licence	UKOG %	Gross mmbbl/mmboe				Net Attributable mmbbl/mmboe				Operator
			1C	2C	3C	mean	1C	2C	3C	mean
Turkey,  Basur-Resan 4	M47 b1, b2	50	14.9	30.5	67.0	37.2	7.5	15.3	33.5	18.6	AME
Horse-Hill Portland 1	PEDL137	85.64	0.6	1.5	3.6	1.9	0.5	1.3	3.1	1.6	HHDL
Horse-Hill Kimmeridge 6	PEDL137	85.64	0.4	1.6	6.1	2.7	0.3	1.4	5.2	2.3	HHDL
Loxley Gas 3 ,5	PEDL234	100	3.1	5.5	9.3	5.9	3.1	5.5	9.3	5.9	UKOG
Arreton Portland 1	PEDL331	95	1.4	3.7	10.3	5.1	1.3	3.5	9.8	4.9	UKOG
Arreton Oolite 1	PEDL331	95	6.2	10.8	17.6	11.5	5.9	10.3	16.7	11.0	UKOG
Avington 2	PEDL070	5	0.5	0.7	1.0	0.7	0.03	0.04	0.05	0.04	IGas
Horndean 2	PL211	10	0.3	0.8	1.3	0.8	0.03	0.08	0.13	0.08	IGas
TOTAL mmboe							18.6	37.3	77.8	44.4

 

Notes:

1. Xodus June 2018, estimates for Horse Hill are deterministic based upon per well recoveries, 2. D&M for IGas Feb 2022, estimates for Horndean and Avington are deterministic, not probabilistic, 3. Xodus September 2020, probabilistic based upon range of recovery factors, 4. Xodus June 2020, probabilistic based upon range of recovery factors, 5. 1 million bbl oil equivalent (mmboe) = 5.8 bcf, 6. RPS Jun 2019.

 

 

Table 3: Prospective Resources (i.e., exploration, drill ready but as yet undiscovered recoverable volumes)

 

Asset	Licence	UKOG %	Gross mmbbl					Net Attributable mmbbl
			Low	Best	High	Mean	Low	Best	High	Mean
Turkey, Prospect A 2	M47 b1,b2	50	4.0	8.7	17.0	9.9	2.0	4.4	8.5	5.0
Godshill Portland 1	PEDL331	95	1.7	6.8	17.4	8.6	1.6	6.5	16.5	8.2
Arreton North 1	PEDL331	95	0.5	2.7	7.6	3.6	0.5	2.6	7.2	3.4
TOTAL							4.1	13.4	32.3	16.6

 

Notes:

1. Xodus June 2018, Godshill possesses the same underlying Lower Oolite potential as Arreton but this target was not reviewed by Xodus in 2018, to be included in any subsequent external CP review, 2. Xodus June 2020

 

 

HEALTH, SAFETY AND THE ENVIRONMENT

 

UKOG is committed to providing, so far as is reasonably practicable, a quality working environment that is safe and one that poses no risks to the health and safety of our employees, contractors, the local community and stakeholders. 

 

The health & safety of employees and the public, and the protection of the environment, are core business objectives of UKOG. They rank equally with the company's other business objectives.

 

Health, safety and environmental (HSE) risks associated with the business practices of UKOG are addressed through the effective implementation of our HSE Policy, which is designed to ensure that every person who works for UKOG is responsible for ensuring that health and safety is managed in all aspects of our business.

 

The Company's HSE aspirations are: "get it right, first time, every time with no accidents, no harm to people, the ecology and the environment".

 

To achieve the identified objectives, we will ensure that all necessary and reasonable resources are made available. We will confirm that objectives are being met by reviewing and reporting on performance and auditing the implementation and operation of UKOG's HSE Management System.

 

Our full HSE framework is available on our website: http://www.ukogplc.com/page.php?pID=101

 

Health & Safety Review

 

UKOG, under our operating subsidiary HHDL, has continued production activities at Horse Hill, including safe completion of well intervention operations. A new, more efficient, enclosed gas flare with lower carbon emissions was installed on the site during the period. An energy efficiency study was also completed for Horse Hill to reduce diesel consumption and carbon emissions, recommending the installation of 250kW solar PV and 67kWh of Li-ion battery storage. In addition, HHDL has continued the process of obtaining the full environmental production permit, including water injection and additional development drilling, from the Environment Agency (EA). The permitting process has taken longer than anticipated with the regulator but award of the permit is expected in Q2 2022.

 

Well site construction, together with the associated access road, and drilling activities were completed without incident by our operating partner AME in Turkey. AME carried out 11 HSE audits of Oceanmec during their drilling operations.

 

There were no lost time injuries or environmental incidents on any of UKOG's sites during the reporting period or post period. The lost time injury frequency was also zero.

 

The EA and Health and Safety Executive made a number of site visits, linked to Horse Hill well operations and production equipment.

 

A workscope for Horse Hill site modifications and upgrades was agreed with the Competent Authority (CA) under Regulation 6 of the Control of Major Accident Hazards Regulations (2015) (COMAH). The first phase of these COMAH upgrades was safely completed in the period.

 

UKOG continues to keep good housekeeping standards on its sites. The Company continuously monitors all its live operations for noise, ensuring noise from its sites is kept to a minimum, and is compliant with the levels set by the relevant site planning approval. UKOG only utilises service companies that can demonstrate commitment to our HSE standards.

 

Community engagement

Any complaints received are reviewed and responded to. Communication links are in place with residents close to our sites, who can call UKOG at any time.

 

Because of our strict Covid-19 policy to ensure the safety of our staff and visitors, we kept visits to Horse Hill to a minimum.

 

The Company meets and communicates regularly with local police to give operational updates.

 

Route to development

 

UKOG operates within a highly regulated industry, led by the OGA, a Government agency reporting to the Department for Business, Energy & Industrial Strategy, who among other things are responsible for checking a company's financial and operational competency before issuing a Petroleum Exploration and Development Licence ("PEDL") and other regulatory approvals.

 

Once a potential site has been identified, UKOG must secure landowner consent and a land lease to operate on the land, before the EA assess any risk to groundwater and air quality, as well as the arrangements for waste management.

 

In parallel with seeking EA permits, discussions with local planning authorities begin. They in turn seek the views of the local community and statutory consultees. The Health and Safety Executive also regulates and monitors all onshore oil & gas exploration and production activities.

 

DIRECTORS' SECTION 172 STATEMENT

 

The following disclosure describes how the Directors have had regard to the matters set out in section 172(1)(a) to (f) and forms the Directors' statement required under section 414CZA of The Companies Act 2006.

 

The matters set out in section 172(1) (a) to (f) are that a Director must act in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

 

•    the likely consequences of any decisions in the long term;

•    the interests of the company's employees;

•    the need to foster the company's business relationships with suppliers/customers and others;

•    the impact of the company's operations on the community and environment;

•    the company's reputation for high standards of business conduct; and

•    the need to act fairly between members of the company.

 

As set out above in the Strategic Report the Board remains focused on providing value for shareholders through the long term success of the Company. The means by which this is achieved is set out further below.

 

Likely Consequences of any Decisions in the Long Term

The Statement From the Chairman, the Chief Executive's Statement and the Strategic Review set out the Company's strategy. In applying this strategy, particularly in seeking new projects and developing current ones to deliver reserves and resource growth, the Board assesses the long term future of our projects and investments with a view to shareholder return. The approach to general strategy and risk management strategy of the group is set out in the Statement of Compliance with the QCA Code of Practice (Principles 1 and 4) on pages 23 to 29.

 

Interest of Employees

The Group has a very limited number of employees and all have direct access to the Executive Directors on a daily basis and to the Chairman, if necessary. The Group has a formal Employees' Policy manual which includes processes for confidential report and whistleblowing.

 

Need to Foster the Company's Business Relationships with Suppliers/Customers and Others

The Group continuously interacts with a variety of suppliers and customers important to its success. The Group strives to strike the right balance between engagement and communication. Furthermore, the Company works within the limitations of what can be disclosed to the various stakeholders with regards to maintaining confidentiality of market and/or commercially sensitive information. Our suppliers are fundamental to ensuring that the Group can execute its development and production strategy on time and on budget. Using quality suppliers ensures that as a business we meet the high standards of performance that we expect of ourselves and vendor partners. Our management team work closely with our suppliers, via one on one meetings and where possible supplier site visits and facility reviews to ensure our suppliers are able to meet our requirements.

 

Impact of the Company's Operations on the Community and Environment

The Group takes its responsibility within the community and wider environment seriously. Its approach to its social responsibilities is set out in the Statement of Compliance with the QCA Code of Practice (Principle 3) on page 23.

 

The Desirability of the Company Maintaining a Reputation for High Standards of Business Conduct

The Directors are committed to high standards of business conduct and governance and have adopted the QCA Code of Practice which is set out on pages 23 to 29. Where there is a need to seek advice on particular issues, the Board will consult with its lawyers and nominated advisers to ensure that its reputation for good business conduct is maintained.

 

The Need to Act Fairly Between Members of the Company

The Board's approach to shareholder communication is set out in the Statement of Compliance with the QCA Code of Practice (Principle 2) on page 23. The Company aims to keep shareholders fully informed of significant developments in the Group's progress. Information is disseminated through Stock Exchange announcements, website updates and, where appropriate, video-casts.

 

During 2021 the Company issued numerous stock exchange announcements on operational issues. All information is made available to all shareholders at the same time and no individual shareholder, or group of shareholders, is given preferential treatment.

 

CORPORATE GOVERNANCE

 

Introduction to Governance

 

The Directors recognise that good corporate governance is a key foundation for the long-term success of the Company. As the Company is listed on the AIM market of the London Stock Exchange it also is subject to the continuing requirements of the AIM Rules. The Board has therefore adopted the principles set out in the Corporate Governance Code for small and midsized companies published by the Quoted Companies Alliance ("QCA Code"). The principles are listed below with an explanation of how the Company applies each principle, and the reasons for any aspect of non-compliance.

 

1. Establish a strategy and business model which promote long- term value for shareholders

 

 

UK Oil & Gas Plc provides shareholders with a full discussion of corporate strategy within our Annual Report. A dedicated section explains how we will establish long term shareholder value, as set out on page 3.

 

The Company is focused around 3 key strategic goals: Maximise production and recovery from its existing asset portfolio, grow the asset portfolio through select onshore development and appraisal projects, actively manage costs and risks through operational and management control of the entire process of exploring, appraising and developing its assets.

 

The Management team actively evaluates projects that simultaneously de-risk the current portfolio and create long-term shareholder value. Projects are evaluated based on many characteristics to mitigate risk to our current activities, including but not limited to, alignment with the Company's core competencies, geography, time horizon and value creation. Further, a core component of the Company's activities includes an active dialogue with our legal and legislative advisors to ensure the Company remains up to date on current legislation, policy and compliance issues.

 

Key business challenges and how they may be mitigated are detailed on pages 10 to 11.

 

2. Seek to understand and meet shareholder needs and expectations

 

 

UKOG encourages two-way communication with institutional and private investors. The Chief Executive talks regularly with the Company's major shareholders and ensures that their views are communicated fully to the Board. Where voting decisions are not in line with the company's expectations the Board will engage with those shareholders to understand and address any issues. The Company Secretary is the main point of contact for such matters.

 

The Company seeks out appropriate platforms to communicate to a broad audience its current activities, strategic goals and broad view of the sector and other related issues. This includes but is not limited to media interviews, website videos, in-person investor presentations and written content.

 

Communication to all stakeholders is the direct responsibility of the Senior Management team. Managers work directly with professionals to ensure all inquiries (through established channels for this specific purpose such as email or phone) are addressed in a timely matter and that the Company communicates with clarity on its proprietary internet platforms. Senior management routinely provides interviews to local media and business reporters in support of the company's activities. The Board routinely reviews the Company communication policy and programmes to ensure quality communication with all stakeholders.

 

3. Take into account wider stakeholder and social responsibilities and their implications for long-term success

 

 

In all endeavours, the Company gives due consideration to the impact on its neighbours. The Company seeks out methodologies, processes and expertise in order to address the concerns of the non-investment community. As such, it actively identifies the bespoke needs of local communities and their respective planners. For example, the company provides for local hotlines and establishes community liaison groups to address local questions and concerns.

 

UKOG seeks to maintain positive relationships within the communities in which it operates. As such, UKOG is dedicated to ensuring:

 

 

• Open and honest dialogue;

• Engagement with stakeholders at all stages of development;

• Proactive addressing of local concerns;

• Active minimisation of impact on our neighbours; and

• Adherence to a strict health and safety code of conduct.

 

As a responsible OGA approved and EA permitted UK operator, UKOG is committed to utilising industry best practices and achieving the highest standards of environmental management and safety.

 

Our operations:

 

• Continuously assess and monitor environmental impact;

• Promote internally and across our industry best practices for environmental management and safety; and

• Constant attention to maintaining our exemplary track record of safe oil & gas production.

 

For more information please refer to page 19 of the Annual Report as well as the Community section within the Company's corporate website.

 

4. Embed effective risk management, considering both opportunities and threats, throughout the organization

 

 

Risk Management on pages 10 to 11 of the Annual Report details risks to the business, how these are mitigated and the change in the identified risk over the last reporting period.

 

The Board considers risks to the business at every Board meeting (at least 4 meetings are held each year) and the risk register is updated at each meeting. The Company formally reviews and documents the principal risks to the business at least annually.

 

Both the Board and senior managers are responsible for reviewing and evaluating risk and the Executive Directors meet at least monthly to review ongoing trading performance, discuss budgets and forecasts and new risks associated with ongoing trading.

 

5. Maintain the Board as a well-functioning, balanced team led by the chair

 

 

Oversight of UKOG is performed by the Company's Board of Directors. Nicholas Mardon Taylor, the Non-Executive Chairman, is responsible for the running of the Board and Stephen Sanderson, the Chief Executive, has executive responsibility for running the Company's business and implementing Company strategy. All Directors receive regular and timely information regarding the Company's operational and financial performance.

 

Relevant information is circulated to the Directors in advance of meetings. In addition, minutes of the meetings of the Directors of the UK subsidiaries are circulated to the Board. All Directors have direct access to the advice and services of the Company Secretary and are able to take independent professional advice in the furtherance of the duties, if necessary, at the company's expense.

 

The Board comprises two Executive Directors and two Non-Executive Directors with a mix of significant industry and business experience within public companies. The Board considers that all Non-Executive Directors bring an independent judgement to bear. All Directors must commit the required time and attention to thoroughly fulfil their duties.

 

The Board has a formal schedule of matters reserved to it and is supported by the Audit, Remuneration, Nomination and AIM Rules compliance committee. The Schedule of Matters Reserved and Committee Terms of Reference are available on the Company's website and can be accessed on the Corporate Governance page of the website.

 

6. Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities

 

 

The Nomination Committee will determine the composition of the Board of the Company and appointment of senior employees. It will develop succession plans as necessary and report to the Directors. Where new Board appointments are considered the search for candidates is conducted, and appointments are made, on merit, against objective criteria and with due regard for the benefits of diversity on the Board, including gender.

 

The Company Secretary supports the Chairman in addressing the training and development needs of Directors.

 

As a small company, all members of the Board share responsibility for all Board functions. As such the Board will from time to time engage outside consultants to provide an independent assessment.

 

7. Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement

 

 

The Board intends to carry out an internal evaluation on individual Directors on an ad-hoc basis in the form of peer reviews and appraisals. The individual reviews and appraisals are used to identify group and individual targets which are reviewed and assessed at the end of the financial year.

 

8. Promote a corporate culture that is based on ethical values and behaviours

 

 

The Company is committed to maintaining and promoting high standards of business integrity. Company values, which incorporate the principles of corporate social responsibilities (CSR) and sustainability, guide the Company's relationships with clients, employees and the communities and environment in which we operate. The Company's approach to sustainability addresses both our environmental and social impacts, supporting the Company's vision to remain an employer of choice, while meeting client demands for socially responsible partners.

 

Company policy strictly adheres to local laws and customs while complying with international laws and regulations. These policies have been integral in the way group companies have done business in the past and will continue to play a central role in influencing the Group's practice in the future.

 

The ethical values of UKOG including health, safety, environmental, social and community and relationships, are set out on page 19 of the Annual Report.

 

9. Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board

 

The Company has adopted a model code for directors' dealings and persons discharging managerial responsibilities appropriate for an AIM company, considering the requirements of the Market Abuse Regulations "MAR"), and takes reasonable steps to ensure compliance is also observed by the Company's employees (AIM Rule 21 in relation to directors' dealings).

 

The Corporate Governance Statement details the company's governance structures, the role and responsibilities of each director. Details and members of the Audit Committee and Remuneration Committee can be found on page 28.

 

10. Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders

 

 

The Company encourages two- way communication with both its institutional and private investors and responds quickly to all queries received. The Chief Executive talks regularly with the Company's major shareholders and ensures that their views are communicated fully to the Board.

 

The Board recognises the AGM as an important opportunity to meet private shareholders. The Directors are available to listen to the views of shareholders informally immediately following the AGM.

 

To the extent that voting decisions are not in line with expectations, the Board will engage with shareholders to understand and address any issues.

 

In addition to the investor relations activities carried out by the Company as set out above, and other relevant disclosures included within the Investor Relations section of the Company's website, reports on the activities of each of the Committees during the year are set out in the Annual Report.

 

While building a strong governance framework the Company also tries to ensure that it takes a proportionate approach and that its processes remain fit for purpose as well as embedded within the culture of the organisation. We continue to evolve our approach and make ongoing improvements as part of building a successful and sustainable company.

 

Board of Directors

 

The Board consists of a team of experienced multidisciplinary members who are committed to delivering shareholder value.

 

Nicholas Mardon Taylor, Non-Executive Chairman

 

Nicholas Mardon Taylor served as the Chief Financial Officer of Hurricane Energy PLC from May 2012 until January 2016. He has worked in the oil industry for over 35 years, his first involvement in the North Sea being in the early licensing rounds. He was with Hurricane from 2005 to January 2016 when he was the Company's first CFO and was subsequently responsible for the Company's Environmental Management System.

 

Stephen Sanderson, Chief Executive

 

Stephen Sanderson joined UK Oil & Gas Plc in September 2014. He was appointed Executive Chairman and Chief Executive in July 2015 and in August 2018 ceded his role as Executive Chairmen as part of improvements in corporate governance. A highly experienced petroleum geologist, oil industry veteran and upstream energy business leader, with over 30 years operating experience, Stephen is a proven oil finder and has been instrumental in the discovery of more than 12 commercial conventional fields, including the Norwegian Smorbuk-Midgaard field complex.

 

Stephen held a variety of senior management roles for ARCO (which was acquired by BP in 2000), Wintershall AG (a subsidiary of German chemical giant BASF) and three junior start-ups. He created and ran successful new exploration businesses in Africa, Europe and South America. He has significant technical and commercial expertise in the petroleum systems of Africa, the North Sea, Norway, onshore UK & Europe, South America, the South Atlantic, Middle East, Asia, India, Australia and the USA. He is a graduate and Associate of the Royal School of Mines, Imperial College, London, a Fellow of the Geological Society of London and a member of the American Association of Petroleum Geologists.

 

Allen D Howard, Executive Director

 

Allen Howard was Senior Vice President of Houston-based Premier Oilfield Laboratories, having been Chief Operating Officer of well analysis experts Nutech. Allen also held senior positions with Schlumberger. He holds a degree in Chemical Engineering from Texas Tech University and an MBA from Mays Business School in Texas. Allen was appointed as Non-Executive Chairman for UKOG in August 2018, before taking up his current Executive role at the beginning of 2022.

 

Kiran Morzaria, Non-Executive Director

 

Kiran Morzaria holds a Bachelor of Engineering (Industrial Geology) from the Camborne School of Mines and an MBA (Finance) from CASS Business School. He has extensive experience in the mineral resource industry working in both operational and management roles. Mr Morzaria spent the first four years of his career in exploration, mining and civil engineering.  He then obtained his MBA and became the Finance Director of Vatukoula Gold Mines Plc for seven years. He has served as a director of a number of public companies in both an executive and non-executive capacity; he is a non-executive director of European Metals Holdings Ltd and the Chief Executive Officer for Cadence Minerals Plc. Mr Morzaria previously served in an Executive capacity as the Finance Director of UKOG, transitioning to his current Non-Executive position at the beginning of 2022.

 

Board and Committee Membership

 

Member	Board Title	Audit Committee Title	Remuneration Committee Title
Stephen Sanderson	Chief Executive
Allen D Howard	Executive Director
Nicholas Mardon Taylor	Non-Executive Chairman	Member	Member
Kiran Morzaria	Non-Executive Director	Chairman	Chairman

 

The Board and its Committees

 

 

The Board of the Company consists of two Executive Directors and two Non-Executive Directors. The Non-Executive Directors are not considered independent under the FRC Code as they hold options and/or shares in the Company. However, the Board considers that the Non-Executive Directors are independent of management under all other measures and are able to exercise independence of judgement.

 

With effect from 1 January 2022 the board was restructured. Kiran Morzaria stepped down as Finance Director and became a Non-Executive Director. Allen Howard moved from Non-Executive Chairman to become an Executive Director of the Company on a part-time basis. Nicholas Mardon Taylor became the Non-Executive Chairman.

 

The Board is responsible for formulating, reviewing and approving the Company's strategy, financial activities and operating performance. Day-to-day management is devolved to the executive directors, who are charged with consulting the Board on all significant financial and operational matters. The Board retains ultimate accountability for governance and is responsible for monitoring the activities of the executive team.

 

The roles of Chairman and Chief Executive are split in accordance with best practice. The Chairman has the responsibility of ensuring that the Board discharges its responsibilities. The Chairman is also responsible for the leadership and effective working of the Board, for setting the Board agenda, and ensuring that Directors receive accurate, timely and clear information. No one individual has unfettered powers of decision.

 

The Chief Executive has the overall responsibility for creating, planning, implementing, and integrating the strategic direction of the Company. This includes responsibility for all components and departments of the business. The Chief Executive ensures that the organisation's leadership maintains constant awareness of both the external and internal competitive landscape, opportunities for expansion, customer base, markets, new industry developments and standards.

 

The Board met regularly during the year. Tabulated below is the attendance of Board Members during the reporting period. Several of the meetings held during the year were in relation to the allotment of equity and, given that these meetings were largely procedural in nature, it was not deemed necessary for the non-executive board members to attend.

 

Board Member	Meetings attended (out of a total possible)
Nicholas Mardon Taylor	3/11
Stephen Sanderson	11/11
Allen D Howard	3/11
Kiran Morzaria	11/11

 

 

Audit Committee

 

 

The audit committee consists of Kiran Morzaria (Chairman) and Nicholas Mardon Taylor. Prior to 1 January 2022 the audit committee consisted of Nicholas Mardon Taylor (Chairman) and Allen D Howard. The Audit Committee met once during the year.

 

Board member	Meetings attended (out of a total possible)
Nicholas Mardon Taylor	1/1
Allen D Howard	1/1

 

The principal duties and responsibilities of the Audit Committee include:

 

·      Overseeing the Company's financial reporting disclosure process; this includes the choice of appropriate accounting policies

·      Monitoring the Company's internal financial controls and assess their adequacy

·      Reviewing key estimates, judgements and assumptions applied by management in preparing published financial statements

·      Annually assessing the auditor's independence and objectivity

·      Making recommendations in relation to the appointment, re-appointment and removal of the company's external auditor

 

Remuneration Committee

 

 

The Remuneration Committee consists of Kiran Morzaria (Chairman) and Nicholas Mardon Taylor. Prior to 1 January 2022 the Remuneration Committee consisted of Nicholas Mardon Taylor (Chairman) and Allen D Howard. The Remuneration Committee met once during the year.

 

Board member	Meetings attended (out of a total possible)
Nicholas Mardon Taylor	1/1
Allen D Howard	1/1

 

The principal duties and responsibilities of the Remuneration Committee include:

 

·      Setting the remuneration policy for all Executive Directors

·      Recommending and monitoring the level and structure of remuneration for senior management

·      Approving the design of, and determining targets for, performance related pay schemes operated by the company and approve the total annual payments made under such schemes

·      Reviewing the design of all share incentive plans for approval by the board and shareholders

 

None of the Committee members have any personal financial interest (other than as shareholders and option holders), conflicts of interest arising from cross-directorships or day-to-day involvement in the running of the business. No director plays a part in any financial decision about his or her own remuneration.

 

Internal Controls

 

 

The Board is responsible for establishing and maintaining the Company's system of internal controls and reviewing its effectiveness. The procedures that include financial, operational, health and safety, compliance matters and risk management are reviewed on an ongoing basis.

 

The Company's internal control procedures include the following:

 

 

• Board approval for all significant projects, including corporate transactions and major capital projects;

• The Board receives and reviews regular reports covering both the technical progress of projects and the Company's financial affairs to facilitate its control;

• There is a comprehensive budgeting and planning system for all items of expenditure with an annual budget approved by the Board;

• The Company has in place internal control and risk management systems in relation to the Company's financial reporting process and the Company's process for preparing consolidated accounts. These systems include policies and procedures to ensure that adequate accounting records are maintained, and transactions are recorded accurately and fairly to permit the preparation of consolidated financial statements in accordance with IFRS; and

• The Audit Committee reviews draft annual and interim reports before recommending their publication to the Board. The Audit Committee discusses with the Chief Financial Officer and external auditors the significant accounting policies, estimates and judgements applied in preparing these reports.

 

The internal control system can only provide reasonable and not absolute assurance against material misstatement or loss. The Board has considered the need for a separate internal audit function but, bearing in mind the present size and composition of the Company, does not consider it necessary at the current time.

 

UK Bribery Act

 

UKOG has reviewed the appropriate policies and procedures to ensure compliance with the UK Bribery Act. The Company continues actively to promote good practice throughout the Company and has initiated a rolling programme of anti-bribery and corruption training for all relevant employees.

 

Relations with Shareholders

 

Communications with shareholders are considered important by the Directors. The primary contact with shareholders, investors and analysts is the Chief Executive. Other senior management, however, regularly speak to investors and analysts during the year.

 

Company circulars and press releases have also been issued throughout the year for the purpose of keeping investors informed about the Company's progress and in accordance with AIM regulations.

 

The Company also maintains a website (www.ukogplc.com) which is regularly updated and contains a wide range of information about the Company.

 

DIRECTORS' REMUNERATION REPORT

 

This report explains our remuneration policy for Directors and sets out how decisions regarding Directors' pay for the period under review have been taken.

 

Directors' Remuneration Policy

 

The Company's policy is to maintain levels of remuneration sufficient to attract, motivate and retain senior executives.

 

Executive Director remuneration currently consists of basic salary, pensions, annual bonus (based on annually set targets) and long-term incentives (to reward long term performance).

 

The Company seeks to strike an appropriate balance between fixed and performance-related reward so that the total remuneration package is structured to align a significant proportion to the achievement of performance targets, reinforcing a clear link between pay and performance. The performance targets for staff, senior executives and the Executive Directors are each aligned to the key drivers of the business strategy, thereby creating a strong alignment of interest between staff, Executive Directors and shareholders.

 

The Remuneration Committee will continue to review the Company's remuneration policy and make amendments, as and when necessary, to ensure it remains fit for purpose and continues to drive high levels of executive performance and remains both affordable and competitive in the market.

 

Annual Statement

 

During the year no annual cash bonus scheme was adopted, as the current remuneration was viewed as sufficient to attract, motivate and retain senior executives. At the end of July 2020 the Directors agreed to an interim salary cut of between 20% and 50% of their monthly salary; this was agreed due to the impact COVID-19 had on the Group's revenues due to a significant reduction in the price of oil. These interim salary cuts remained in place until March 2021 at which point previous salaries were reinstated.

 

During the year and as required under the Pensions Act of 2008 the Company implemented an automatic enrolment pension scheme and contributed up to 3% of Executive Directors qualifying earnings.

 

Remit of the Remuneration Committee

 

The remit of the Remuneration Committee is provided in the Corporate Governance section.

 

Share Price Movements During the Year

 

The Company's share price as at 30 September 2021 was £0.0014 per share. The share price range during the year was £0.0035 to £0.0012 (2020 - £0.0016 to £0.0115).

 

Current Arrangement in Financial Year (Audited)

 

 

Executive Directors are employed under rolling contracts with notice periods of 12 months or less from the Company. Non-Executive Directors are employed under rolling contracts with notice period of three months, under which they are not entitled to any pension, benefits or bonuses.

 

During the years ended 30 September 2020 and 2021 the Directors occupied the following Board positions: Allen D Howard (Non-Executive Chairman), Stephen Sanderson (Chief Executive Officer), Kiran Morzaria (Finance Director), Nicholas Mardon Taylor (Non-Executive Director). The Directors' emoluments for the year were as follows:

 

		Year ended 30 September 2021
		Salary	Bonus	Pension	Share Based Payments	Benefits in Kind	Total
Director	Board Position*	£'000	£'000	£'000	£'000	£'000	£'000
Nicholas Mardon Taylor	Non-Executive Director	44	-	-	-	-	44
Stephen Sanderson	Chief Executive	284	-	1	-	1	287
Allen D Howard	Non-Executive Chairman	48	-		-	-	48
Kiran Morzaria	Executive Director	92	-	1	-	-	93
Total Directors		468	-	2	-	1	471

 

		Year ended 30 September 2020
		Salary	Bonus	Pension	Share Based Payments	Benefits in Kind	Total
Director	Board Position*	£'000	£'000	£'000	£'000	£'000	£'000
Nicholas Mardon Taylor	Non-Executive Director	49	-	-	-	-	49
Stephen Sanderson	Chief Executive	297	-	1	-	3	301
Allen D Howard	Non-Executive Chairman	54	-	-	-	-	54
Kiran Morzaria	Executive Director	115	-	-	-	-	115
Total Directors		515	-	1	-	3	519

 

*Board positions listed are the positions which were occupied during the financial year being reported. The Board was subsequently restructured with effect from 1 January 2022, as detailed within the Corporate Governance section.

 

As at 30 September 2021, the outstanding long-term incentives, in the form of options, held by the Directors who served during the period are set out in the table below.

 

	At 1 October 2020	Issued during the year	lapsed / exercised during the year	At 30 September 2021	Exercise price	Date from which exercisable	Expiry date
Share options	No.	No.	No.	No.	£
	million	million	million	million
Stephen Sanderson	25	-	-	25	0.0115	25/05/2017	24/05/2022
Stephen Sanderson	25	-	-	25	0.0130	27/09/2020	25/09/2024
Total	50	-	-	50

 

 

	At 1 October 2020	Issued during the year	lapsed / exercised during the year	At 30 September 2021	Exercise price	Date from which exercisable	Expiry date
Share options	No.	No.	No.	No.	£
	Million	million	million	million
Kiran Morzaria	20.0	-	-	20.0	0.0115	25/05/2017	24/05/2022
Kiran Morzaria	6.5	-	-	6.5	0.0130	27/09/2020	25/09/2024
Total	26.5	-	-	26.5

 

 

	At 1 October 2020	Issued during the year	lapsed / exercised during the year	At 30 September 2021	Exercise price	Date from which exercisable	Expiry date
Share options	No.	No.	No.	No.	£
	Million	million	million	million
Allen Howard	10	-	-	10	0.0115	25/05/2017	24/05/2022
Allen Howard	5	-	-	5	0.0130	27/09/2020	25/09/2024
Total	15	-	-	15

 

	At 1 October 2020	Issued during the year	lapsed / exercised during the year	At 30 September 2021	Exercise price	Date from which exercisable	Expiry date
Share options	No.	No.	No.	No.	£
	million	million	million	million
Nicholas Mardon Taylor	4	-	-	4	0.0130	27/09/2020	25/09/2024
Total	4	-	-	4

 

 

REPORT OF THE DIRECTORS

 

The Directors present their annual report together with the audited consolidated financial statements of the Group for the Year Ended 30 September 2021.

 

Business Review and Future Developments

 

A review of business activities in the year and future developments is outlined in the Statement From The Chairman (page 5), the Chief Executive's Statement (page 6) and the Operational Review (page 12).

 

Principal Activity and Business Review

 

The principal activity of the Group is exploring for, appraising and developing oil & gas assets.

 

Results and Dividends

 

Loss on ordinary activities of the Group after taxation amounted to £4,833,000 (2020: loss of £20,937,000).  The Directors do not recommend the payment of a dividend (2020: £nil). The Company has no plans to adopt a dividend policy in the immediate future.

 

Principal Risks and Uncertainties

 

Information of the principal risks and uncertainties facing the Group is included in the Principal Risks and Uncertainties section of the Strategic Report.

 

Financial Risk Management Objectives and Policies

 

The Group's principal financial instruments are trade receivables, trade payables, cash at bank, and borrowings.  The main purpose of these financial instruments is to fund the Group's operations.

 

It is, and has been throughout the period under review, the Group's policy that no trading in financial instruments shall be undertaken. The main risk arising from the Group's financial instruments is liquidity risk. The Board reviews and agrees policies for managing this risk and this is summarised below.

 

Liquidity Risk

 

The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of equity and its cash resources. Further details of this are provided in the principal accounting policies, headed 'going concern'.

 

Key Performance Indicators ("KPI's")

 

KPI's adopted by the Group are detailed in the KPI's section of the Strategic Report.

 

Going Concern

 

The Directors note the losses and cash outflows that the Group has made for the year ended 30 September 2021. The Directors have prepared cash flow forecasts for the period to 31 March 2023, which take into account anticipated production and costs, the forward curve of Brent crude oil and external funding.

 

The Group closely monitors and manages its liquidity risks. Cash flow forecasts for the Group are regularly produced based on, inter alia, management's best estimate of the Group's production and expenditure forecasts and future oil prices. The cost structure of the Group comprises a high proportion of discretionary spend and therefore in the event that cash flows become constrained, costs can be quickly reduced to enable the Group to operate within its available funding.

 

Notwithstanding the Company's current cash balance and minimal contractual expenditure commitments, the Board are cognisant of the potential impacts of COVID-19 or other possible unforeseen events outside of its control on the Group. Whilst the potential future impacts are unknown, the Board has considered the operational disruption that could be caused by factors such as national restrictions enforced in response to the COVID-19 pandemic, factoring in these potential impacts and reasonable mitigating actions to forecasts and sensitivity scenarios.

 

Taking into account anticipated production and costs, the forward curve of Brent crude oil and external funding, forecasts prepared demonstrate that the Group will have sufficient cash funds available to allow it to continue in business for a period of at least twelve months from the date of approval of these financial statements. The Company has minimal contractual expenditure commitments and the Board considers that in conjunction with equity or debt financing, the present funds are sufficient to maintain the working capital of the Company for a period of at least 12 months from the date of signing the Annual Report and Financial Statements. For these reasons the Directors adopt the going concern basis in the preparation of the Financial Statements.

 

Events After the Reporting Period

 

Events after the Reporting Period are outlined in Note 24 to the Financial Statements.

 

Corporate Governance

 

Information in relation to the Corporate Governance of the Group is contained within the Corporate Governance Section of the Strategic Report.

 

Suppliers' Payment Policy

 

The Group's policy is to agree terms and conditions with suppliers in advance; payment is then made in accordance with the agreement provided the supplier has met the terms and conditions. Suppliers are typically paid within 30 days of issue of invoice.

 

Charitable Contributions

 

 

During the year the Group made charitable donations amounting to £Nil (2020 - £Nil).

 

Substantial Shareholdings

 

 

As at 06 January 2022, the Company had been notified of the following substantial shareholdings in its ordinary share capital:

 

Shareholder	Number of Ordinary Shares	Holding %
Hargreaves Lansdown (Nominees) Limited	2,148,165,647	13.23%
Interactive Investor Services Nominees Limited	1,731,921,508	10.67%
Hargreaves Lansdown (Nominees) Limited	1,451,439,204	8.94%
Barclays Direct Investing Nominees Limited	1,228,568,726	7.57%
Interactive Investor Services Nominees Limited	1,117,483,614	6.88%
Hargreaves Lansdown (Nominees) Limited	1,060,037,130	6.53%
HSDL Nominees Limited	1,039,533,166	6.40%
HSDL Nominees Limited	750,162,712	4.62%
HSBC Client Holdings Nominee (Uk) Limited	550,403,443	3.39%
Jim Nominees Limited	524,815,517	3.23%

 

Current Board & Directors Interests

 

 

Nicholas Mardon Taylor	Non-Executive Chairman
Stephen Sanderson	Chief Executive
Allen D Howard	Executive Director
Kiran Morzaria	Non-Executive Director

 

The directors hold options to purchase new ordinary shares in the Company, details of which are specified in the Renumeration Report on page 30 to 32. In addition, Stephen Sanderson holds 3,470,387 ordinary shares in the Company and Kiran Morzaria holds 4,508,178 ordinary shares in the Company.

 

Auditor

 

PKF Littlejohn LLP has expressed their willingness to continue in office as auditor and a resolution to reappoint PKF Littlejohn LLP as auditor will be proposed at the forthcoming Annual General Meeting ("AGM").

 

Annual General Meeting

 

 

Notice of the forthcoming Annual General Meeting has been enclosed separately.

 

Statement of Directors' Responsibilities

 

 

The Directors are responsible for preparing the annual report and financial statements in accordance with applicable law and regulations.

 

Under that law the Directors have elected to prepare the Group and Parent Company financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to:

 

·      Select suitable accounting policies and then apply them consistently;

·      Make judgements and estimates that are reasonable and prudent;

·      State whether applicable IFRS's have been followed, subject to any material departures disclosed and explained in the financial statements; and

·      Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements comply with the Companies Act 2006.  They are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website.  Legislation in the United Kingdom governing the preparation and dissemination of the financial statements may differ from legislation in other jurisdictions. The Company's website is maintained in accordance with AIM Rule 26.

 

Statement as to Disclosure of Information to the Auditor

 

 

As at the date of this report the serving directors confirm that:

 

·      So far as each Director is aware, there is no relevant audit information of which the Group's auditors are unaware, and

·      They have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the Group's auditor are aware of that information.

 

ON BEHALF OF THE BOARD

 

 

 

Stephen Sanderson

Director

24 March 2022

 

 

REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF UK OIL & GAS PLC

 

Opinion

We have audited the financial statements of UK Oil & Gas plc (the 'parent company') and its subsidiaries (the 'group') for the year ended 30 September 2021 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Statement of Financial Position, the Consolidated and Parent Company Statements of Changes in Equity, the Consolidated and Parent Company Statements of Cash Flow and notes to the financial statements, including significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and international accounting standards in conformity with the requirements of the Companies Act 2006 and as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

In our opinion:

·      the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at 30 September 2021 and of the group's loss for the year then ended;

·      the group financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006;

·      the parent company financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and as applied in accordance with the provisions of the Companies Act 2006; and

·      the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We are independent of the group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Conclusions relating to going concern

In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the directors' assessment of the group's and parent company's ability to continue to adopt the going concern basis of accounting included a review of the group cash flow forecasts, and challenging the areas of management judgement and estimation uncertainty. Discussions with management surrounding the groups committed costs and assessment of those against current cash balances in a disaster scenario, to ensure the group have sufficient funds to continue to operate as a going concern.

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group's or parent company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.

Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.

Our application of materiality

For the purposes of determining whether the financial statements are free from material misstatement, we define materiality as a magnitude of misstatement that makes it probably that the economic decisions of a reasonable knowledgeable person, relying on the financial statements, would be changed or influenced. We also determine a level of performance materiality which we use to assess the extent of testing needed to reduce an appropriately low level in the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

Materiality for the group financial statements was set at £600,000 (2020: £788,000). This was calculated based in 1.5% of net assets for the year. Net assets was used as the benchmark for the basis of materiality being the key area of relevance to stakeholders in assessing the financial performance of the group in its early years of production. The same basis for the calculation of materiality for the parent company financial statements was used, however restricted to £599,999 (2020: £787,999), to ensure a level below that of group materiality as required by ISA (UK) 600.

We also determine a level of performance materiality which we use to assess the extent of testing needed to reduce to an appropriately low level probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. Performance materiality for the group and part company was set at £390,000 (2020: £472,800) and £389,999 (2020: £472,799) respectively, being 65% of materiality for the financial statements as a whole.

We agreed to report to those charged with governance all corrected and uncorrected misstatements we identified through our audit with a value in excess of £30,000 for both the group and parent company. We also agreed to report any other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.

Our approach to the audit

The scope of our audit was influenced by our application of materiality. The quantitative and qualitative thresholds for materiality determine the scope of our audit and the nature, timing and extent of our audit procedures.

As part of our planning, we assessed all components of the group for their significance under ISA (UK) 600 in order to determine the scope of the work to be performed. Those entities of the group which were considered to be significant components, being UK Oil & Gas plc and Horse Hill Developments Limited, were subject to full scope audit procedures, and those considered to be material, being UKOG (137/246) Holdings Limited, UKOG (234) Limited and UKOG (37/246) Limited were subject to audit procedures on significant and identified risk areas only, in accordance with ISA (UK) 600 for group reporting purposes. Procedures were then performed to address the risks identified and for the most significant assessed risks of material misstatement, the procedures are outlined below in the key audit matters section of this report. The remaining components were subject to analytical review procedures.

We did not rely on the work of any component auditors.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

 

Key Audit Matter	How our scope addressed this matter
Carrying value and correct classification of exploration and evaluation assets (Note 11) There is a risk that the assets are incorrectly valued or need to be impaired. As Horse Hill entered the production stage last year, there is a risk that the assets are incorrectly included as intangibles when they should be reclassified to Tangibles.	Our work in this area included: ·      Reviewing impairment workings prepared by management against the criteria per IFRS 6, and challenging the assumptions  made thereto; ·      Vouching a sample of additions in the period to supporting documentation and ensure they meet the capitalisation criteria per IFRS 6; ·      Reviewing the effect of COVID-19 on the group and the potential profitability of said assets; and ·      Vouched a sample of exploration and evaluation assets at the year end to supporting licences and ensuring they are valid There are no key observations outside of the work performed above.
Carrying value of producing assets (Note 12) There is a risk of material misstatement around the carrying value of PPE, whether any impairment is required and if the correct assets have been included within PPE compared to Exploration and Evaluation of Assets.	Our work in this area included: ·      A review of management's net present value workings, and challenging key assumptions made including the discount rate, forecasted oil price and reserves estimates; ·      Reviewing the effect of COVID-19 on the group and the potential profitability of said assets; ·      Reviewing the unit of production method of depletion and performing a recalculation of the charge thereto; ·      Verifying the mathematical accuracy of calculations prepared by management; and ·      Physically verifying a sample of assets to support existence and correct classification. ·      Impairment charges were process in respect of the carrying value of HHDL following the receipt of the Exodus reserves estimate report. Key Observations: The impairment assessment of the Horse Hill Developments Oil & Gas Properties took into consideration an oil price of $91/barrel, being the spot rate at assessment. Forward curves provide significant differing estimates, and thus management have determined this to be the most appropriate for this assessment within these financial statements. If the oil price were to change, this will affect the value in use assessment of the assets and either increase or decrease the impairment charge processed.

 

Other information

The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon. The directors are responsible for the other information contained within the annual report. Our opinion on the group and parent company financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

Opinions on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of the audit:

·      the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

·      the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception

In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors' report.

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

·      adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

·      the parent company financial statements are not in agreement with the accounting records and returns; or

·      certain disclosures of directors' remuneration specified by law are not made; or

·      we have not received all the information and explanations we require for our audit.

Responsibilities of directors

As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the group and parent company financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the group and parent company financial statements, the directors are responsible for assessing the group and the parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:

·      We obtained an understanding of the group and parent company and the sector in which they operate to identify laws and regulations that could reasonably be expected to have a direct effect on the financial statements. We obtained our understanding in this regard through discussions with management, industry research, application of cumulative audit knowledge and experience of the sector.

·      We determined the principal laws and regulations relevant to the group and parent company in this regard to be those arising from:

-     Companies Act 2006

-     IFRS

-     Employment Law

-     Bribery Act

-     Tax legislation

-     Health and Safety legislation

-     Environmental law

·      We designed our audit procedures to ensure the audit team considered whether there were any indications of non-compliance by the group and parent company with those laws and regulations. These procedures included, but were not limited to:

-     enquiries of management

-     review of RNS announcements

-     review of board and other committee minutes

·      We also identified the risks of material misstatement of the financial statements due to fraud. We considered, in addition to the non-rebuttable presumption of a risk of fraud arising from management override of controls, and the information disclosed in the Key Audit Matters section of this report, we did not identify any significant fraud risks.

·      As in all of our audits, we addressed the risk of fraud arising from management override of controls by performing audit procedures which included, but were not limited to: the testing of journals;  reviewing accounting estimates for evidence of bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.

Because of the inherent limitations of an audit, there is a risk that we will not detect all irregularities, including those leading to a material misstatement in the financial statements or non-compliance with regulation. This risk increases the more that compliance with a law or regulation is removed from the events and transactions reflected in the financial statements, as we will be less likely to become aware of instances of non-compliance. The risk is also greater regarding irregularities occurring due to fraud rather than error, as fraud involves intentional concealment, forgery, collusion, omission or misrepresentation.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

Use of our report

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone, other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

 

 

Alistair Roberts (Senior Statutory Auditor)                                                                                                         15 Westferry Circus

For and on behalf of PKF Littlejohn LLP                                                                                                                           Canary Wharf

Statutory Auditor                                                                                                                                                           London E14 4HD

                                              

24 March 2022

 

 

FINANCIAL STATEMENTS

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR YEAR ENDED 30 September 2021

 

	Notes	30 Sep 2021	30 Sep 2020
		£'000	£'000
Revenue	6	1,562	908
Cost of sales
Depletion, Depreciation and Amortisation		(684)	(1,367)
Other Cost of Sales		(1,067)	(1,171)
Gross loss		(189)	(1,630)
Operating expenses
Administrative expenses		(2,098)	(1,755)
Impairment expense	12	(1,456)	(10,652)
Foreign exchange losses		(62)	(16)
Operating loss	6	(3,805)	(14,053)
Finance Cost	8	(89)	(286)
Exploration Write-off	11	(946)	(6,598)
Loss before taxation		(4,840)	(20,937)
Taxation	9	(43)	-
Retained loss for the year		(4,883)	(20,937)
Retained loss attributable to;
Equity holders of the Parent		(4,492)	(20,937)
Non-Controlling Interests		(391)	-
		(4,883)	(20,937)

There are no other comprehensive income or expenses during the two reported periods to disclose.

 

All operations are continuing.

 

 

 

Earnings per share		Pence	Pence
Basic and diluted	10	(0.03)	(0.24)

 

 

 

The accompanying accounting policies and notes form an integral part of these financial statements.